Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘Chapter 13 payment plan’ tag

Timing Chapter 13 to Discharge Income Taxes

August 3rd, 2020 at 7:00 am

Usually you can discharge income taxes (write them off forever) by waiting long enough to file bankruptcy. Here’s how it works with Chapter 13.


Our blog post of three weeks ago introduced the importance of timing your bankruptcy filing right. We gave a list of 15 examples where timing can make a huge difference. Two weeks we covered the first one, timing bankruptcy to cover as many debts as possible. Last week was about discharging/writing off income taxes, specifically under a Chapter 7 “straight bankruptcy.” This week is about doing so under Chapter 13 “adjustment of debts.”

How to Time a Chapter 13 Filing to Discharge a Tax?

See our last blog post about the timing rules under Chapter 7. That’s because whether you can discharge an income tax is the same under Chapter 7 and 13. Very briefly, you can discharge an income tax as long as you file your Chapter 13 case both:

  1. at least 3 years after the tax return for that tax was due, and
  2. at least 2 years after that tax return was actually submitted to the IRS or state tax authority.  

See Sections 507(a)(8)(A)(i) and 523(a)(1)(B) of the U.S. Bankruptcy Code for these two timing rules.

You and your bankruptcy lawyer will carefully review and apply these rules to see if you can meet them. Your situation may be too urgent to wait long enough. There may be creditor pressures, by the IRS/state tax agency or other unrelated creditors, so you can’t wait. Or there may be other good reasons to file before enough time has passed.

But let’s assume that you find out that you can meet the two timing rules. Also assume that you meet other conditions for discharging the tax. (See last week’s blog post for some other conditions beyond the two timing ones.) You file the Chapter 13 case and the income tax debt qualifies for discharge.

Then what happens? How is the tax dealt with under Chapter 13?

Using Chapter 13 Instead of Chapter 7 to Discharge a Tax

Chapter 7 usually discharges a dischargeable income tax very fast. The moment you file your bankruptcy case the “automatic stay” would protect you from all collection of that tax. Then you would very likely no longer legally owe the tax about 4 months after filing a Chapter 7 case.

Chapter 13 is just as fast at protecting you from tax collection: the “automatic stay” goes immediately into effect. But the discharge of the tax happens only at the end of the case, usually 3 to 5 years later.

Furthermore, often you need to pay some portion of that tax before you can discharge the rest. Not always, but if you have money to spare in your payment plan some will go towards the tax.

Why in the world would you file a Chapter 13 case when it’s so much slower? Why would you when under Chapter 13 you risk paying something on the tax instead of nothing?

Why Discharge Tax through Chapter 13?

The straightforward reason is that Chapter 13 could be much better for you for other reasons. Those other reasons may outweigh the benefit of discharging your dischargeable tax debt quickly and completely.

Chapter 7 and 13 each has tons of potential advantages and disadvantages. Your bankruptcy lawyer’s job is to help you determine whether the other advantages of Chapter 13 outweigh these disadvantages.

What might be some of those advantages?

One example: you may owe some other income tax debt(s) which do not meet the timing conditions for discharge. So these other taxes would not be discharged under either Chapter 7 or 13. In a Chapter 7 case, you’d owe that tax in full immediately upon finishing the case, about 4 months after filing. Interest and penalties would continue accruing. Those tax/interest/penalties may be too large to pay off reasonably through a monthly payment plan with the IRS/state.  It may not qualify for an Offer in Compromise or other settlement. Chapter 13 would enable you to pay it more flexibly, usually without accruing interest and penalties. So, you could well save money and avoid significant risks by handling all of your taxes in a Chapter 13 case.

There are many, many other reasons unrelated to income taxes that Chapter 13 could be worthwhile for you. It could potentially prevent a home foreclosure or vehicle repossession, and then give you a workable way to save the home or vehicle. Chapter 13 can often solve child or spousal support problems much better than Chapter 7. There are many other situations where Chapter 13 gives you extraordinary powers over your debts. So those advantages can make this longer procedure very worthwhile overall.

How Does Chapter 13 Discharge an Income Tax?

Assume again that your tax debt qualifies for discharge, timing-wise and by meeting all the legal conditions. So it can get discharged in your Chapter 13 case.

However, Chapter 13 treats a dischargeable tax differently than under Chapter 7. As mentioned above, the discharge happens at the end of the case usually years later. And you may have to pay something on it before then.

What determines how much, if any, you pay on this tax?

Under Chapter 13 a dischargeable income tax debt is treated like the rest of your “general unsecured” debts. Under your payment plan all such debts receive the same percentage of their total amounts. That percentage may be any amount from 0% to 100% of the debt amount, depending on your budget and other factors.

That’s right: it’s theoretically possible that you’d have to pay 100% of your tax and other debts. But that’s highly unlikely. That only happens if you have enough money in your budget that you can reasonably afford to do so. That’s very rare.

More likely your budget is barely enough for living expenses and to pay special higher-priority debts during your case. That could result in your dischargeable tax debt (and all your “general unsecured” debts) receiving 0%—absolutely nothing.

To make better practical sense of this, let’s look at two situations: First, this “0% plan,” and second, where your tax debt does not increase what you pay to your creditors.

The 0% Payment Plan

As just mentioned, in this kind of Chapter 13 case all your available money goes to living expenses plus special debts. Those special debts are either secured or “priority” ones. These could include home mortgages, vehicle loans, nondischargeable taxes, child and spousal support, and such. The law usually requires you to pay them in full before paying anything to the “general unsecured” debts.  As a result it’s possible that during your 3-to-5-year payment plan there’s no money at all for your “general unsecured” debts. That means that one of those debts, the dischargeable income tax, also receives nothing. That’s called a 0% Chapter 13 plan. (The percentage means the extent to which you’re paying the general unsecured debts.) These 0%cases are not unusual (although there are regional variations).

If you successfully complete a Chapter 13 case, when you do your bankruptcy judge discharges the entire tax. Under a 0% plan, you didn’t pay any of the tax debt during the case. And then after the discharge you don’t have to pay any of it either, foreever.  

Fixed Total Amount Chapter 13 Plans

There are other Chapter 13 payment plans in which your tax debt does not increase the amount you pay. You pay a fixed total amount to your creditors based on the amount you can afford to pay beyond your living expenses.

Often the practical effect of this is that there is some money for your “general unsecured” debts. So it’s not a 0% plan.

But because the amount you pay over the life of the case is a fixed amount, the amount left over for the pool of general unsecured debts, after paying certain secured and priority debts, is a fixed amount as well. That in turn means that all the general unsecured debts have to split up that left over amount. (This is true as long as the total amount of those debts is greater than the amount you can afford to pay. That’s almost always the situation. Otherwise you likely don’t need Chapter 13 help.)

With all the general unsecured debts being paid out of that fixed amount, this means that the total amount of this debt doesn’t matter. If the total debt amount is higher, this just means that you pay each debt a lower percentage.

This means that having a dischargeable tax debt often does not increase the amount you pay.

An Example

Here’s a simple example. Assume that during the life of a 3-year payment plan you expect to have money to pay a total of $3,000 into the pool of general unsecured debts. That’s based on what you can reasonably pay to all your debts, minus what goes to secured and priority debts. Assume also that you have $60,000 in unsecured credit cards and medical debts. This means that the $3,000 you pay would amount to paying 5% of these general unsecured debts. ($3,000 divided by $60,000 equals 5%.) 

Now assume that you also have a $10,000 of dischargeable income tax debt. You add this to the $60,000, making a total of $70,000 of general unsecured debts. Now the $3,000 gets divided among the $70,000 in debts, meaning that now you are only paying 4.3% of those debts ($3,000 divided by $70,000 equals 4.3%.) 

This situation—where you’re paying a fixed amount to the general unsecured debts—is very common. So it’s common that having a dischargeable tax debt actually does not add anything to the amount you pay. That tax debt just reduces the percentage that all the general unsecured debts receive.

 

New Modified 7-Year Chapter 13 Plans

May 11th, 2020 at 7:00 am

The coronavirus CARES Act temporarily allows ongoing Chapter 13 plans to be amended or “modified” to last a total of 7 years (instead of 5). 

 

Last month we described the changes to bankruptcy law made by the coronavirus CARES Act enacted on March 27, 2020. One of those changes is the ability to extend the length of ongoing Chapter 13 payment plans. Until now these previously-approved plans could last from a usual minimum of 3 years to a maximum of 5 years. That maximum has now been extended to 7 years.

Longer Plans Can Be Very Helpful

Overall, longer Chapter 13 payment plans give you more flexibility. And greater flexibility is one of the main advantages of the Chapter 13 bankruptcy option.

Usually you want to finish your bankruptcy case as soon as possible to get on with life. But often having more time within Chapter 13 can be a huge benefit.

You choose Chapter 13 over Chapter 7 “straight bankruptcy” to meet a specific goal (or two). You’re saving your home from foreclosure, or cramming down a vehicle loan, or paying nondischargeable income taxes. You’re keeping an asset you’d otherwise lose, catching up on child or spousal support, or saving a sole proprietorship business.  

To accomplish these goals you have to pay a certain amount into your Chapter 13 plan over time. Having more time to do so means being able to pay less per month during the plan. This can make the difference between a plan payment that you can’t afford and one that you can. So, having the option of two more years to finish off a payment plan can make the difference between an impossible plan and a feasible one. It’s the difference between an unsuccessful Chapter 13 case and a successful one.

Longer Plans during the Pandemic

This is especially true during this time of the COVID-19 pandemic. If you lost your job or have taken a pay cut while you’re in a Chapter 13 case, you may not be able to make your plan payment at all. Or you may only be able to pay a lower amount.

More time to pay means that you would likely be able to skip some payments if your unemployment is temporary. You would likely be able to reduce the plan payments—either temporarily or from now on—and still finish successfully.

This greater flexibility could well become especially important going forward. That’s because for most of us the pandemic’s financial consequences will likely be playing out for many months. So having this extra two-year cushion to finish your case successfully may become invaluable.

Only Court-Approved Plans Included

However, these new 7-year Chapter 13 payment plans have two strict timing considerations.

First, this 7-year change applies “to any case for which a plan has been confirmed… before the date of enactment of this Act.” Coronavirus Aid, Relief, and Economic Security Act (“CARES”), Section 1113(b)(1)(D(ii). CARES was enacted on March 27, 2020. The “confirming” of a plan is the bankruptcy judge’s formal approval of a plan that you and your bankruptcy lawyer proposed. Confirmation usually occurs at or around the time of your “confirmation hearing.” That’s usually happens about two months after you file your Chapter 13 case.

So to be able to extend your plan up to 7 years you must have had a court-confirmed plan by March 27. Even if you’d filed your case but your plan wasn’t confirmed by that date, you’re limited to the 5-year maximum.

Second, this 7-year provision has a “sunset” clause. It’s deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2). So assuming you had a confirmed plan before March 27, 2020, you must successfully modify your payment plan by March 26, 2021. Otherwise you’d lose out on this temporary 7-year plan modification option.

The Primary Condition to Meet

The new law says that you can modify a plan if you are “experiencing or [have] experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic.” CARES, Section 1113(b)(1)(C). What a “material financial hardship” is, especially one “due… indirectly… to the… pandemic,” isn’t clear. Presumably a job or income loss related in any way to the pandemic should count. Beyond that bankruptcy judges will be making case by case decisions about what circumstances qualify.  

The Usual Other Conditions for Modification Still Apply

The modified plan also must meet the normal set of conditions laid out in Chapter 13 of the Bankruptcy Code. (“Sections 1322(a), 1322(b), 1323(c), and the requirements of section 1325(a) [of the Bankruptcy Code] shall apply to any [such plan] modification… .” CARES, Section 1113(b)(1)(C).) Generally these are the same conditions that you had to meet to get your original plan—or a previous modified plan—approved. Contact with your bankruptcy lawyer about qualifying.

Other Changes May Be Coming

There will very likely be more legislation coming from Congress regarding the pandemic. Some may tweak the Bankruptcy Code further. The 7-year provision may be extended more, such as to new Chapter 13 cases. We will report on any such future changes affecting bankruptcy.

 

Priority Debt for Intoxicated Driving

March 16th, 2020 at 7:00 am

If you injured someone by unlawfully driving while intoxicated, the resulting personal injury debt would be a priority debt in bankruptcy.   

Priority Debts

For many weeks our blog posts have been considering how bankruptcy deals with “priority” debts. Examples of these special debts that we’ve covered include child/spousal support, income taxes, and wages owed employees. Sections 507(a)(1),(4), and (8) of the U.S. Bankruptcy Code.

There’s one more kind of priority debt. It does not come up often but if it affects you, you need to know about it.

Priority Debts vs. Non-Dischargeable Debts

But first we need to clear up something that could be quite confusing.

Some debts cannot be discharged (legally written off) in bankruptcy, or can’t in certain circumstances. For example, bankruptcy never discharges child/spousal support debt, and discharges income taxes only under certain conditions. So the issue is whether or not you will owe the debt after the bankruptcy case is over. See Sections 523 and 524 of the Bankruptcy Code.

Whether or not a debt is a priority debt is a different consideration. Those are debts that the law treats with greater priority during the bankruptcy case itself.  For example, in an asset Chapter 7 case—one in which the bankruptcy trustee has assets to distribute to creditors—priority debts receive payment in full before general unsecured debts receive anything. Similarly, in a Chapter 13 case, the debtor must pay priority debts in full during the payment plan. General unsecured debts usually receive payment only to the extent you can afford to pay them after the priority debts.

The confusion comes from the fact that most, but not all, priority debts also cannot be discharged in bankruptcy. But that’s not absolutely always true. The considerations are sometimes different. In any event, priority and dischargeability are different considerations that have different consequences in different situations. You and your bankruptcy lawyer need to consider them separately.

Specifically with debts related to driving while intoxicated, the law makes those debts nondischargeable in many situations. See Bankruptcy Code Section 523(a)(9). But those situations are not exactly the same ones as the ones determining priority. The rules are a bit different. And again, the discharge of drunk driving debts vs. whether they qualify as priority are separate considerations with different consequences. We’re focusing today on the priority question.

Debts from Unlawful Operation of a Vehicle because Intoxicated

The Bankruptcy Code says that a debt is a priority debt if it is

for death or personal injury resulting from the operation of a motor vehicle or vessel if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.

Section 507(a)(10).

Under this language there are three key issues:

  1. It covers debts related to death or personal injury. The statutory language doesn’t cover property damage. Those would not be priority debts. However, in most accidents the personal injury side of the accident debts is much larger than the property damage side.
  2. The debt must come from your unlawful operation of a vehicle. So, the issue is whether you met your state’s standards of unlawful intoxication.
  3. Debts arising from other forms of unlawful operation of vehicle not involving intoxication are not priority debts. For example injuries resulting from speeding or reckless driving would not qualify as a priority debt.

The Consequences of Being Priority Debt

The consequences of having a personal injury debt being priority are different under Chapter 7 and Chapter 13.

Under a Chapter 7 “straight bankruptcy” case it only matters if it’s an asset case. As mentioned above, those are ones in which your trustee has assets with which to pay some of your debts. In that case he or she would pay your priority debts before paying other debts. So if you had a priority personal injury debt, it would receive payment before all non-priority debts. There’s a good chance the assets the trustee is distributing would not be enough to pay off the personal injury debt. Then you may or may not owe the balance depending on the discharge considerations mentioned above.

Most Chapter 7 cases are no-asset ones. All of your assets are “exempt,” protected from bankruptcy trustee liquidation. So the trustee has no assets to pay any creditors, including the priority personal injury debt. So there’s no practical effect from that debt being a priority debt. Again, whether or not you continue to owe the debt after the case is over turns on the separate discharge issue.

Under a Chapter 13 “adjustment of debts” case, your court-approved payment plan must “provide for the full payment” of all debts “entitled to priority.”  Bankruptcy Code Section 1322(a)(2).  Therefore you must budget enough to pay off a priority personal injury debt during the payment plan. You’d have 3 to 5 years to do so. You’d pay that in full before paying anything on non-priority unsecured debts. However, if that priority debt is huge, you may not have enough money to pay it off within that time. If so, a Chapter 13 case would likely not be a feasible solution. Therefore, determining whether the personal injury debt is or is not a priority debt would likely be very important.

 

Paying Employee Debt in Chapter 13

March 2nd, 2020 at 8:00 am

If you prefer to pay back wages to a present or prior employee, you can do so in Chapter 13 especially well if that debt is a priority one.

 

Our last three blog posts have been about debts you owe to your employees or independent contractors. Specifically, we discussed the conditions under which past wages, commissions, or benefits qualify as a“priority” debt. These posts covered:

  • the conditions that apply to both employees and independent contractors (3 weeks ago)
  • the special additional condition applicable only to independent contractors (2 weeks ago)
  • an example of paying an employee’s wages as a priority debt in an “asset” Chapter 7 case (last week)

Today, we’ll show how you could pay an employee/independent contractor in full in a Chapter 13 “adjustment of debts” case.

Why Priority Matters under Chapter 13

Assume you’d really like your former (or ongoing) employee/independent contractor to receive payment on what you owe. Whether that debt qualifies for priority status often determines whether you’ll pay that debt or not. Or it may determine whether it’s paid in full, in large part, very little, or nothing at all.

Focusing on Chapter 13, whether or not a debt qualifies as a priority one is usually crucial. That’s because you are legally obligated to pay all priority debts in full. Debts that don’t qualify as priority usually receive much less, and sometime receive nothing.

Your Chapter 13 payment plan must show how you will pay all priority debts. The bankruptcy judge will otherwise not approve the payment plan. The U.S. Bankruptcy Code is straightforward:

(a) The plan—

(2) shall provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507

Section 1322 of the Bankruptcy Code.

(There’s an exception if the employee/independent contractor agreed not to receive “full payment.” But assume here that—as is almost always true—he or she does want to get fully paid and won’t agree not to be.)

So what happens under Chapter 13 if that wage/commission debt does not meet the conditions to be priority debt? That wage/commission is lumped in with all the other ordinary “general unsecured” debts. Very seldom do Chapter 13 plans pay general unsecured debts in full. (A so-called 100% plan.) Most often they receive significantly less than 100%. (Say, a 30% or 40% plan.) Quite often they receive payment of only pennies on the dollar. (For example, a 3% plan.) Finally, it’s not unusual that general unsecured debts—including a non-priority wage/commission debt—would receive absolutely nothing. (A so-called 0% plan.)

In summary, your plan must pay a priority debt in full. But the plan will very likely pay your general unsecured debts a fraction, or possibly even nothing.

Our Chapter 13 Case Example

Assume you owe a prior employee $5,000 for wages earned over a period of four months. This period was from 150 to 30 days ago, at which point you had to lay him off.

Your sole proprietorship business is still operating. You intend to close it and file a Chapter 13 bankruptcy soon. You have a decent job waiting for you as soon as you do, and have some flexibility when to start.

You owe $125,000 on all of the rest of your debts, which are all general unsecured. None are priority debts except potentially the $5.000 you owe to your prior employee.

Reminder about the Priority Conditions

As discussed in our last 3 blog posts, a wage is a priority debt if it meets two conditions:

  1. it was “earned within 180 days before the date of the filing of the [bankruptcy] petition or the date of the cessation of the debtor’s business, whichever occurs first …”. Section 507(a)(4) of the Bankruptcy Code.
  2. the amount is no more than $13,650. Section 507(a)(4) of the Bankruptcy Code, plus a cost-of-living adjustment of the $10,000 stated there.

With the amount of the wage owed in our example being $5,000, this debt meets the second, dollar-limit condition. So we focus the rest of this blog post on the first, timing condition.

Timing the Filing of Your Chapter 13 Case

As you can see from the timing language in the statute above, a wage’s priority status turns on when the employee earned it.  The wage (or commission or benefits) must have been earned within a 180-day period. That period must be immediately before either the closing of your business or your filing Chapter 13, whichever of those happens first.

Back to the Example

To pay the $5,000 wage debt in full, you need to have it meet the conditions of priority status. Your business is still operating at the moment. You have control over when to cease operating, and when to file the Chapter 13 case.

In the real world you actually likely have limited control over these two events. You likely have various constraints on both. Timing when to shut down even a small business usually involves a variety of practical, and sometime tough, choices. Timing a Chapter 13 filing likely turns on the creditor collection pressures and there are often other legal timing considerations.

But let’s assume you have at least some flexibility. Under our facts, if you want this employee’s wage debt to be a priority debt you need to do one of two things within the next 30 days. You need to either close down your business or file your Chapter 13 case within that time.  After that some of this employee’s wages will start turning into general unsecured debt. (Recall it was all earned 150 to 30 days ago.) So after 30 days the oldest of the wages will be start being more than 180 days old. Then 210 days from now the last of the wages would turn into general unsecured debt.

If you can’t file your Chapter 13 within 30 days for practical or legal reasons, it’s enough to just shut down your business. As you see from the statute’s language, that triggers the 180-day period, even if you don’t file the Chapter 13 case until later.

What Happens in the Chapter 13 Case

Assume you either shut down your business or file your Chapter 13 case within the next 30 days. Then the $5,000 wage debt would be a priority debt. Simply put, Chapter 13 law requires the payment plan you and your bankruptcy lawyer put together to include enough money to pay that $5,000. The bankruptcy court would otherwise not approve the plan. Furthermore, you could not complete the case without actually paying off that $5,000.

Now assume instead that you don’t shut down your business and don’t file Chapter 13 until after 210 days from now. Then, as just discussed, none of the wage debt would qualify as priority. It would all be general unsecured debt. Assume that in the next 3 years you would afford to pay $200 per month on all of your debts. That’s a total of $7,200. Assume that you paid all your attorney fees when you filed your case (leaving none to pay in the plan). In your jurisdiction assume the Chapter 13 trustee gets 5% of everything that flows through the plan—$360. That leaves the rest—$6,840—to go to all of the creditors. The general unsecured debts total $130,000—$125,000 plus the $5,000 wage debt. The $6,840 would be divided among this $130,000, meaning that these debts would receive about 5% of the amounts owed. Your former employee would receive only about $250 on the $5,000 wage debt.

So, if the $5,000 wage debt would qualify as priority, your former employer would receive payment in full. If none of it would so qualify, your employee would receive only about $250

.

A Chapter 13 Plan to Catch up on Past-Due Support

February 3rd, 2020 at 8:00 am

Here’s an example of a Chapter 13 payment plan to pay past-due child and/or spousal support, showing how you can catch up safely and sanely

 

Today we put what we explained in the last three weeks of blog post into a sample Chapter 13 plan. It shows how powerfully Chapter 13 helps you if you owe past due child and/or spousal support. A Chapter 13 filing protects you from the aggressive collection of overdue support, immediately and as long as needed. And through the Chapter 13 payment plan you get a reasonable and even peaceful way to catch up on support.

The Example

Assume you’ve fallen behind on both child and spousal support because your income was interrupted. You owe $6,000 in past-due support. You’re back at work so you can now pay your ongoing monthly support but have no way to catch up. You have too many other debts.

Your ex-spouse’s support enforcement agency is poised to garnish your wages for the past-due support. If they did so you wouldn’t be able to pay your vehicle loan payment and you’d lose your vehicle.

Assume that the divorce decree requires you to pay $900 in monthly child support and $600 in monthly spousal support, $1,500 total, for 5 more years. So the $6,000 in past-due support represents 4 months of missed payments.

You got a good deal on the vehicle loan. So the vehicle is worth about as much as you owe on it—$10,000. Your monthly payments are $425 per month, with 25 more payments to go.

Besides the $5,000 in past-due support and the vehicle loan, you owe $95,000 in other debts. These other debts are all unsecured credit cards and medical bills—“general unsecured debts” under bankruptcy law. If you pay the monthly payments on the credit cards you have no money left for the medical debts, much less the $1,500 in ongoing support payments. You are in a very tight financial box.

Chapter 13 gets you out of that box fast, and solves these problems permanently.

Your Chapter 13 Budget and “Disposable Income”

Filing a Chapter 13 case stops the collection of past due support immediately. See our blog posts of 2 and 3 weeks ago about this works and the conditions you must meet. See the blog post of last week about how the Chapter 13 plan gives you a safe and flexible way to catch up on the support. Today’s example brings all this together.

In a Chapter 13 case you and your bankruptcy lawyer put together a monthly budget of your income and expenses. That budget gives you money to pay your ongoing monthly support as well as you own reasonable expenses. See Subsection 1325(b)(2)(A)(i) of the U.S. Bankruptcy Code.

The amount left over is your monthly “projected disposable income.” See Section 1325(b)(1)(B)  of the Bankruptcy Code.

The way this works is your monthly expenses exclude any debt payments. Your expenses DO include the $1,500 in child and support payments since that’s a required ongoing expense. But your expenses don’t include any money for the past-due support since that part is a debt.

Your expenses for determining your disposable income also don’t include the $425 vehicle loan payment. That is of course a debt as well.

Assume that after subtracting all of your monthly expenses (including the $1,500 in support) your monthly “projected disposable income” is $500. You commit to paying that amount to all of your creditors for the following 3 years in your Chapter 13 payment plan.  

The Chapter 13 Plan

Paying $500 per month for 3 years would in most situations be enough to take care of all your debts. This includes the $6,000 in past-due support. At the end of 3 years you would have paid off the vehicle loan, caught up on the support, and be free and clear on all your other debts.

How could this be when you owe $425 per month on just your vehicle loan? And what about the $95,000 in credit card and medical debts? How could just $500 per month over 3 years cover ALL of these debts?

This is possible for the following main reasons. Chapter 13 usually allows you to:

  1. Delay paying the past-due support until your plan pays certain other debts first—here the vehicle loan.
  2. Pay the general unsecured debts only as much as you have disposable income to pay them. The rest is forever written off (“discharged”).

In this present example $525 per month for 36 months provides a total of $18,900 to pay on all the debts. About $10,665 of that would go to the $10,000 vehicle loan (the extra amount being interest). $6,000 would go to pay the past-due support.

That leaves $2,235. The Chapter 13 trustee (who receives and distributes your $525 payments) gets a fee. In this case assume 5% of every dollar that flows through the plan, or $945 here.

That now leaves $1,290. Your bankruptcy lawyer gets paid out of your plan to the extent you didn’t pay him or her in advance. Most or all of that $1,290 would like go to your lawyer.

This leaves nothing for the $95,000 in general unsecured debts. In many circumstances that’s allowed. It’s called a 0% Chapter 13 plan—paying the general unsecured debts 0% of the debt amounts.

The Result Here

In this example you could stop paying all your debts when you filed your Chapter 13 case. Support enforcement would immediately stop as to the past-due support. All other collection of debts would stop as well. You would have a budget enabling you to take care of all your reasonable and necessary expenses. That would include your ongoing monthly support obligations. You would protect your vehicle loan and your vehicle.

After 3 years you’d have paid off your vehicle loan, caught up on support, paid all expenses of the Chapter 13 case, and paid nothing on the general unsecured debts and yet no longer owe anything on them. This is an incredibly good result.

Other Possibilities

In many circumstances Chapter 13 gives you results this good as to your past-due support and otherwise. But in other circumstances Chapter 13 is extremely helpful yet not as perfect results. For example, your case may take longer than 3 years—it can be as long as 5 years. You may have to pay general unsecured debts something instead of nothing, sometimes even a significant percentage. This blog post has been long enough so we’ll look at such other scenarios next week.

 

Catching up on Support through Chapter 13

January 27th, 2020 at 8:00 am

Chapter 13 gives you a powerful, reasonable, flexible, and even calm procedure for catching up on your past-due child or spousal support. 

 

The last two weeks we’ve shown how Chapter 13 can stop the collection of unpaid child and spousal support. First we talked about how this benefit is much better than Chapter 7 can provide. Then we focused on the ongoing conditions you must meet to keep up this protection.

But there’s a second benefit of Chapter 13 that deserves attention. It doesn’t just stop the collection of unpaid support. Chapter 13 provides a powerfully flexible way to catch up on that support debt.

Why This Is a Huge Benefit

Whatever child or spousal support you owe at the time of your bankruptcy filing, you can’t write off (“discharge”). It’s among the relatively few kinds of debts that bankruptcy does not discharge under any circumstances. See U.S. Bankruptcy Code Sections 523(a)(5) and 101(14A). So you have to pay it, whether you file bankruptcy or not. Whether you file Chapter 7 or 13 or any other kind of bankruptcy.

So this is a debt you have to pay. The issue is what is the easiest, most financially sensible and low-stress way to do so. 

As we discussed in our blog post 3 weeks ago, Chapter 7 doesn’t help much. It doesn’t stop the collection of unpaid support at all. You’re on your own catching up on any unpaid support.

Chapter 13 does stop the collection of unpaid support immediately, and continues to protect you as long as you meet some ongoing conditions.  What Chapter 13 also does is provide you the tool to pay off the support debt. That tool is a court-approved payment plan for all your debts, based on what you can actually afford to pay. That payment plan enables you to catch up on your support debt over time. The plan works into your budget all your other debts—especially other debts very important to you. So you can catch up on your support at a sensible pace without being hounded about it.

How the Chapter 13 Payment Plan Works

How could this possibly work in real life? Consider the following:

  1. The Chapter 13 payment plan is based on your actual income and reasonable expenses.
  2. The plan prioritizes debts in a way that’s generally in your favor.
  3. Other debts sometimes get your money ahead of the support debt, usually to your benefit.
  4. You have 3-to-5-years to catch up on all your unpaid support debt.

We’ll take these four one at a time.

1. Based on Actual Income and Expenses

The Chapter 13 payment plan usually involves a single monthly payment to all of your creditors. (Although sometimes a special debt is paid separately, like a home mortgage.) That single monthly payment is based on what you can actually afford to pay. It’s based on your actual income and reasonable expenses. The income is a projection based on your very best estimate of how much you’ll make each month. The expenses try to cover all your expenses, including ones that don’t happen every month. (For example, vehicle maintenance and repairs, and medical expenses.)

The point is to determine how much you can truly and reasonably afford to pay monthly in a sustainable way. It should not cause you anxiety. You should feel confident that you can fulfill your payment plan.

2. Prioritizing Debts

A Chapter 13 plan basically divides debts into those you must pay in full and those you pay only as much as you can afford to pay. 

The unpaid support debt is in the first category. This category may also include other such must-pay debts like recent income taxes. It can also include secured debts like vehicle or mortgage obligations.

The second category usually includes all other debts—your “general unsecured” debts. These you usually pay only as much as you can, if there’s any money left over for them at all.

So Chapter 13 lets you focus your limited financial resources on those debts that you need to pay. And it gives you an extended time to pay them, so that you can afford to do so.

3. Paying Other Debts Ahead of Support

Outside the protection of Chapter 13, arguably no debts come ahead of unpaid support. That’s because the law makes the support enforcement collection tools so powerful.

But within the protection of a Chapter 13 case and plan, those aggressive collection tools are tamed. So you don’t necessarily pay an unpaid support debt first in the plan. You may have other debts—especially a secured debt or two—that you can pay first. So if you are behind on your mortgage, or doing a cram-down on your vehicle loan, you can often pay these ahead of your support debt.   If you owe other “priority” debts like recent income taxes, your plan usually pays your support debt along with such other important debts.

With Chapter 13 you’re not at the mercy of these important creditors. Your court-approved payment plan gives you a great way to deal with them all, including the support.  

4. Pay Off Unpaid Support by Case Completion

As mentioned, you have as long as 5 years to catch up on your unpaid support. Your official plan does need to include enough money to accomplish that (and everything else that must get paid). And you do need to fulfill the terms of that plan successfully to the end. Of course if you have an ongoing support obligation you have to keep paying that. (It will be included in your monthly expenses.)

Then by the end of your payment plan you will be current on your support. You’ll have paid off or gotten current on all your other special debts. Whatever you haven’t paid on your general unsecured debts will get discharged. And you’ll be free and clear of all debts.

 

A Chapter 13 Plan to Pay Income Tax

December 30th, 2019 at 8:00 am

Here’s an example of a Chapter 13 payment plan to pay income tax, showing how you pay what you can afford and avoid some interest, penalties. 

 

Today we put the facts of last week’s blog post into a Chapter 13 plan, showing how it actually works. You’ll see how Chapter 13 saves you money and avoids stress as you pay off your priority income taxes.

The Example: The Tax, Interest, and Penalties

Assume you owe $10,000 to the IRS for income taxes from the 2016 tax year. That’s for the tax alone without the penalties and interest. Plus you owe interest of $1,200 (currently 5% annually), $2,000 for a failure-to-file penalty (which the IRS assesses  at 5% per month of being late), and $1,650 for a failure-to-pay penalty (calculated at 0.5% per month). So including the current interest of $1,200 and a total of $3,650 in penalties this $10,000 tax has turned into a total debt to the IRS of $14,850. And the interest and failure-to-pay penalty just keep on accruing.

As we showed two weeks ago, this relatively recent $10,000 income tax itself can’t be discharged (written off) in bankruptcy. You’d have to figure out a way to pay it after completing a Chapter 7 “straight bankruptcy” case. In a Chapter 13 case you pay that amount through your court-approved payment plan.

The Tax and Interest vs. the Penalties

In either a Chapter 7 or Chapter 13 case the $1,200 in accrued interest has to be paid in full as well. The interest continues accruing nonstop during and after a Chapter 7 case. The difference is that interest effectively stops accruing under Chapter 13. You don’t have to pay any interest beyond the case filing date as long as you successfully complete your case.

The situation is usually the same with any penalties that accrue beyond the bankruptcy case filing date. Under Chapter 7 the penalties continue to accrue, during the case and after it’s completed. Penalties keep getting added on until the tax is paid in full. But under Chapter 13 the penalties generally stop accruing. This is true as long as the IRS did not record a lien on this specific tax before you filed the Chapter 13 case.  (Prior-recorded tax liens create a number of complications that we don’t get into here.)

So, in a Chapter 7 case (or outside of bankruptcy altogether) you’d have to pay the full $14,850 of tax/interest/penalties. Plus the interest and penalties would continue to accrue until you finished paying off the entire debt. If you’d pay it off slowly in an extended monthly payment plan, the additional interest and penalties would be substantial. Conceivably you could end up paying around $20,000 for the $10,000 tax.

In contrast, in a Chapter 13 case you may only pay the $10,000 tax plus prior-accrued $1,200 of interest. Assuming no tax lien and a successfully completed 0% Chapter 13 case, you’d be paying about $11,200 instead of as much as $20,000. (In a 0% case there’s no money for the general unsecured debts.)

The Chapter 13 Plan

To keep this explanation as straightforward as possible, assume you owe this IRS tax debt and only other simple debts. That is, all your other debts are “general unsecured” ones. They are not secured—such as a vehicle loan, home mortgage, and a debt with any other collateral. They are not special, priority debts like unpaid child support or other recent tax debts. Chapter 13 is actually often very good at handling multiple secured and priority debts. In fact it’s often the very best tool if your situation is complicated with such other tough debts. But for the sake of this example we focus on how Chapter 13 handles this single income tax debt.

So assume you have a lot of medical bills, credit cards, and/or other general unsecured debts—say $90,000 total. Your prior accrued income tax penalties of $3,650 are also general unsecured debts, so now the total is $93,650. This plus the 2016 tax-plus-interest amount of $11,200 means you have just under $105,000 in debt. Here’s how a Chapter 13 plan with these debts could look like.

You and your bankruptcy lawyer would put together your monthly budget. Let’s say that after subtracting you and family’s reasonable living expenses from your monthly income, you’d have $385 per month left in “disposable income.” That would not even come close to paying monthly payments on your $105,000 or so of debt.

The Great Result Here

But this $385 amount would be enough—just enough—to pay off your IRS debt in full in just 3 years. $385 for 36 months is enough to pay off the $10,000 base tax, plus the $1,200 in already accrued interest. It would also pay a relatively modest amount of Chapter 13 trustee’s fees (generally a set percentage of whatever you pay into your payment plan) and your own attorney’s fees (whatever you didn’t pay before filing your case). The law usually allows (indeed requires) these “administrative costs” to get paid before the general unsecured debts receive anything.

So in this example $385 per month for 36 months would pay off the $11,200 priority portion of your tax debt. ($10,000 + $1,200.) But beyond that there would not be any money for the general unsecured debts. This means there would be nothing for the $3,850 in prior accrued tax penalties.

As a result all of your “disposable income” during the 3 years of the plan would go just to pay the tax and prior interest. (Plus the mandatory “administrative costs.”)  Then after the 36th month of payments, your Chapter 13 plan would be finished. At that point all of your general unsecured debts would be legally discharged. This includes the $3,850 in prior tax penalties. In addition, the IRS would then wipe off its books any penalties and interest that would have accrued since the date of your Chapter 13 filing.

After only paying the $10,000 tax plus $1,200 in prior interest, you’d owe the IRS nothing. You’d also be free and clear of all the rest of your debts. After paying only as much as your budget allowed for 3 years, you’d have a completely fresh financial start.

 

Paying Income Taxes through Chapter 13

December 23rd, 2019 at 8:00 am

Chapter 13’s advantages in paying off your priority income taxes become clearer when you see what you don’t have to pay.

 

Last week we got into the advantages of paying priority income taxes through a Chapter 13 “adjustment of debts” case. Those are the usually-recent income taxes which cannot be written off (“discharged”) in bankruptcy. Today we show more clearly how Chapter 13 can be tremendously helpful with income taxes.

The Example: The Tax Breakdown

This example expands on one we introduced last week. Assume that you owe $10,000 to the IRS for income taxes from the 2016 tax year.

In addition there’s a failure-to-file penalty of $2,000 for filing 4 months late without getting an extension. The IRS assesses that penalty  at 5% per month of being late. So here, 4 months at $500 per month = $2,000.

Plus there’s a failure-to-pay penalty of $1,650. That’s calculated at 0.05% each calendar month or partial month that the tax remains unpaid. So here, 33 months or partial months from the April 2017 payment due date to December 2019, at $50 per month = $1,650. (Note that this penalty is reduced to 0.025% per month if you’re in an IRS payment plan.)

You also owe interest on the unpaid tax. It’s more complicated to calculate because the rate changes. It’s been at 5% per year since April 1, 2018 and 4% for two years before that. Plus it compounds daily. To keep it simple, assume for this example that $1,200 of interest has accrued on the $10,000 tax owed.

So combining these, assume you owe $10,000 in 2016 income tax, plus $3,650 in penalties ($2,000 + $1,650), plus $1,200 in interest, a total of $14,850 owed to the IRS for this tax year.

The Tax and Interest vs. the Penalties

1. Accrued interest. If an income tax does not qualify for discharge (under the rules discussed last week), neither does the interest. So during a Chapter 13 case you’d have to pay the tax and the interest (accrued up to the date of bankruptcy) in full. In our example that’s the $10,000 in straight tax plus the $1,650 of interest, or $11,650.

2. Accrued penalties. But the accrued penalties are quite different. These are usually not treated as priority debt but rather as general unsecured debt. (This assumes there’s no recorded tax lien on the tax, which could make the debt partly or fully secured.) In a Chapter 13 case you pay general unsecured debt only to the extent you can afford to do so. This is AFTER paying all priority and appropriate secured debts. Often you don’t have to pay general unsecured debts, including tax penalties, much. It’s not uncommon that you pay nothing.

In our example the $3,650 in penalties is general unsecured debt. So during the course of your 3-to-5-year case you pay this portion only as much as you can afford. You may pay nothing.

3. Ongoing interest and penalties. Usually you don’t pay any ongoing interest or penalties on the tax during the Chapter 13 case. The IRS continues to track it. But as long as you finish the case successfully you will not have to pay any of it. This lack of ongoing interest for 3 to 5 years saves you a lot of money. It also often enables you to end your case more quickly.

Filing the Chapter 13 Case

Now assume you filed a bankruptcy case on December 10, 2019. You were in a hurry to file because the IRS was threatening to garnish your paycheck. The 2016 income tax is not discharged in bankruptcy because it’s  less than 3 years from the tax return filing deadline of April 15, 2017 and the December 10, 2019 filing date.

If you filed a Chapter 7 “straight bankruptcy” that would have provided only limited help. It would have stopped the IRS’s garnishment threat for 3 or 4 months while the Chapter 7 case was active. Then if discharging your other debts would free up enough cash flow so that you could reliably get on an installment payment plan with the IRS to pay off the $14,850 reasonably quickly, then Chapter 7 might make sense.

But that’s a big “if” which doesn’t happen often in the real world.  And even if this scenario were possible, you’d likely pay much more than under Chapter 13. After a Chapter 7 case, you’d have to pay the $3,650 in accrued penalties in full (instead of only in part or not at all under Chapter 13). Interest, and the failure-to-pay penalty, would continue accruing non-stop, until paid off. This adds to the amount you eventually have to pay. Each time you’d make a payment, part would go to that month’s new interest and penalties. So you have to keep paying longer.

Chapter 13 Instead

We’ve explained why his situation should play out much better under Chapter 13. But we’ll show how it actually works over the course of a payment plan in our blog post next week.

 

Priority Income Tax Debts under Chapter 13

December 16th, 2019 at 8:00 am

Chapter 13 gives you huge advantages for paying off your priority income tax debts. You’re protected while you pay what you can afford.


Last week we discussed the advantages of paying priority debts through a Chapter 13 “adjustment of debts” case. We referred to recent income taxes as one of the most important kinds of priority debt. Today we show how Chapter 13 can greatly help you take care of recent income tax debts.

Recent Income Taxes Can’t Be Discharged

The law treats some, usually more recent, income tax debts very differently than other, usually older, income tax debts. Generally, new income taxes are “priority” debts and can’t be discharged (written off) in bankruptcy.

There are two conditions determining whether a tax debt can be discharged. (There are a few other conditions but they are not very common so we don’t address them here.) Bankruptcy does NOT discharge an income tax debt:

1. if the tax return for that tax debt was legally due less than 3 years before you file your bankruptcy case (after adding the time for any tax return-filing extensions) U.S. Bankruptcy Code Section 507(a)(8)(A)(i).

OR

2. if you actually submitted the tax return to the IRS/state less than 2 years before you file the bankruptcy case. Bankruptcy Code Section 523(a)(1)(B)(ii).

Two Examples

Assume you filed a bankruptcy case on December 10, 2019. You owe income taxes for the 2017 tax year. The tax return for that tax was due on April 17, 2018 (because of a weekend and holiday). (This assumes no tax return filing extension.) That’s much less than 3 years before the December 1, 2019 bankruptcy filing date. So, no discharge of the 2017 tax debt, because of the first 3-year condition above.

As for the second condition above, assume again that you filed your bankruptcy case on December 10, 2019.  This time change the facts so that you submitted the tax return late for the 2015 taxes, on October 1, 2018. That’s less than two years before the December 10, 2019 bankruptcy filing date. So because of the second condition above, taxes due for 2015 would not get discharged in bankruptcy

Meeting either of the two conditions makes the tax debt not dischargeable. In the second example immediately above, more than 3 years had passed since the deadline to submit the tax return. (The 2015 tax return was due on or about April 15, 2016.) But less than two years had passed since the actual submission of the tax return. So, no discharge of the tax debt.

With no discharge, you would have to pay that income tax debt after finishing a Chapter 7 case. But there are advantages of paying this priority debt in a Chapter 13 case.

Advantages of Paying Priority Income Tax Debts in Chapter 13

Under Chapter 13:

  1. You are protected from aggressive collection by the IRS/state not for 3-4 months as in Chapter 7 but rather 3-5 years.
  2. This includes preventing any new recorded tax liens, and getting out of any installment payment plans.
  3. The amount you pay monthly to all your creditors, including the priority tax, is based on your actual budget. It’s not based on the often unreasonable requirements of the IRS/state.
  4. The amount your priority tax gets paid each month (if any) among your other debts is flexible. You do have to pay all of the priority tax debt(s) by the time you finish your Chapter 13 case. That’s up to a maximum 5 years. But other more urgent debts (such as catching up on a home mortgage) can often get paid ahead of the taxes.
  5. Usually you don’t pay any ongoing interest or penalties on the tax during the Chapter 13 case. That takes away the need to pay it quickly. Plus the lack of additional interest and penalties significantly reduces the amount needed to pay off the tax debt.
  6. If the IRS/state recorded a tax lien against your home or other assets before you filed bankruptcy, Chapter 13 provides a very efficient and favorable forum to value and pay off that secured portion of the priority debt.

 

Chapter 13 Really Helps Delay Your Home Sale

October 14th, 2019 at 7:00 am

Chapter 13 gives you much more power over your mortgage and other home-related debts so that you can sell your home when it’s best for you. 

 

Our last blog post was about using Chapter 7 “straight bankruptcy” to buy time to sell your home.  The advantages of Chapter 7 are that it’s usually quite quick and costs less that Chapter 13. It also importantly focuses on your present income and on the present value of your home. If you expect either your income or your property’s value to increase substantially, Chapter 7 could be your better option.

Chapter 7 Disadvantages—Buys Limited Amount of Time

However, Chapter 7’s quickness can often turn into a disadvantage. If you’re behind on your mortgage, or another home-related debt, the protection Chapter 7 provides against them doesn’t last long. The “automatic stay” protection lasts—at most—only 3-4 months, because that’s how quickly most cases finish. If within that time you don’t work out payment arrangements with them, they can start or resume collections and/or foreclosure.  

So Chapter 7 often doesn’t give you much additional time to sell your home.

Chapter 7 Disadvantages—Buys Limited Leverage with Ongoing Creditors

Also, if your mortgage holder or other home-related creditor refuses to negotiate, you have almost no leverage under Chapter 7. Not only does automatic stay protection expire within just a few months, the creditor can often speed up that timetable. Chapter 7 doesn’t give you any other strong tools directly against your mortgage holder or home lienholder. Mostly what it does is discharge (write off) other debts so that you can focus on your home creditor(s). If that doesn’t buy enough time to sell your home, than Chapter 7 is probably not your best solution.

Chapter 13 Advantages—Buys Much More Time and Leverage

A Chapter 13 “adjustment of debts” case buys you time and flexibility if you want to keep your home and are behind on your mortgage and/or other home-related debts. Basically it does so by protecting you and your property while you catch up in 3 to 5 years.

These are all also true if you want to sell your home but need more time to do so. Chapter 13 can often prevent you from being rushed into selling when the market is not the best for selling. For example, instead of being forced to sell during the holiday season you could sell during the prime spring season. Or hold off on selling when doing so now would cause personal or family hardships. ln many situations you could delay selling your home for many months, or even years.

The Power of Chapter 13

The way this works is that you and your bankruptcy lawyer put together a monthly payment plan covering the next 3-to-5-years.  This plan goes through a 2-3-month bankruptcy court approval process. The plan would show how you’d make progress towards catching up on your mortgage and other especially important debts. Usually you’d pay general unsecured debts only as much as you can afford to pay them after paying other more important debts. Often these unsecured debts don’t receive much, sometimes nothing.

Your payment plan would likely refer to your intent to sell your home, if that was to happen during the 3-to-5-year period. You’d have to pay your monthly mortgage in the meantime. And usually you’d have that same length of time to catch up on a first or second mortgage. Same thing if you were behind on property taxes or anything else that was a lien on your home’s title. This can often enable you to delay selling your home for years.

What if you couldn’t afford to catch up within even the 3-to-5-year length of a Chapter 13 payment plan? Under some circumstances you wouldn’t have to pay that much. If there is enough equity in the home, you could pay less towards catching up on the mortgage (property taxes, etc.) and just pay the remaining amount out of the proceeds of the intended home sale.

Conclusion

Chapter 13 could enable you to delay selling your home until the time is right for you. If your home has a healthy equity cushion, you could catch up on some or all of the missed mortgage payments (or property tax arrearage or some other home-secured debt) until you sell the home. In the meantime as long as you fulfill the terms of the court-approved payment plan, you wouldn’t have to worry about a pending foreclosure or other collection pressures. Instead you could focus on making the regular monthly mortgage payments and Chapter 13 plan payments. And then sell your home at a time that serves you best. 

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top